Q4 2020 TCG BDC Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the D. C. G BDC, Inc. Fourth quarter, 'twenty and 'twenty earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press the start and the one key on you touched on the telephone.
Please be advised that today's conference maybe recorded.
Operating assistance. Please press Star then zone.
I would now like to turn the conference over to you speak a host of day Allison with dairy. Please go ahead.
Good morning, and welcome to TCG BDC fourth quarter 2020 earnings call last night, we use it and earnings press release and detailed earnings presentation without quarterly result.
A copy of which is available on TCG Bdc's Investor Relations website for.
And my remarks today people hold the question and answer session for analysts and institutional investors.
And is being webcast and a replay will be available on our website and.
Any forward looking statements made today do not guarantee future performance and undue reliance should not be placed on them. These statements are based on current management expectations and they involve inherent risks and uncertainties, including those identified and the risk factors section of our annual report on form 10-K that could cause actual results to differ materially from those indicated TCG BDC assumes no obligation.
And to update forward looking statements and I mean.
And with that I'll turn the call over to our Chief Executive Officer, Linda pace.
Thank you Allison.
Good morning, everyone and thank you for joining us on this call to discuss our fourth quarter 2020 results.
Joining me today are Chief investment Officer, Taylor, Boswell, and our Chief Financial Officer, Tom Hennigan.
Overall, we had another very solid quarter and throughout a volatile year, we were successful and managing the performance of our portfolio fortifying, our balance sheet and leveraging our origination capabilities.
We exit 2020 with a high degree of confidence and the fundamental credit trajectory of our portfolio and our prospects for sustained income generation.
I'll focus my detailed remarks today on three areas.
First our quarterly results and our positive momentum entering 2021.
Second our approach to the current investment environment, and finally, how our company and shareholders benefit from our relationship with Carlyle.
We generated net investment income of 38 cents per common share and declared a total dividend of 37 cents per share.
You will recall our dividend policy provides for a base amount of 32 cents per share and fixed quarterly dividends and.
And bind with recurring supplemental dividends of excess earnings each quarter, which this quarter was five cents per share for a total of 37 cents.
As Tom will detail later, we continue to forecast earnings well in excess of our base dividend and the coming quarters.
Net asset value per share increased two five percentage quarter over quarter from $15 one to $15.39.
Loan valuations again improved driven not just by rebounding market yields, but more importantly, improving improving credit performance.
We also resumed our share repurchase program last quarter repo.
Repurchasing 1 million shares of our common stock.
This resulted in eight cents of accretion to net asset value.
Well, we have always approached our repurchase strategy with an eye towards consistency and our stock's recent valuation we remain active acquirers of our shares.
With an underlying macroeconomic recovery underway and positive credit performance and our portfolio. We expect 2021 to offer opportunity for continued positive map migration.
As we previewed in our last call for fourth quarter proved to be and extremely robust origination environment with M&A demand rebounding briskly from the depths of the crisis.
Much of our market has recovered quickly and a short period of time, we're pleased that our proactive portfolio and capital actions and 2020 position C. G. B D to access the attractive new deal market and the back half of last year.
We've maintained the same momentum and activity, thus far and the new year and our.
Cited about both the quantity and quality of transactions in front of us.
Currently we are seeing attractive first lien opportunities and our core markets and are well positioned to be opportunistic and other areas, where we see favorable risk adjusted returns.
As always we remain focused on our defensive approach to both asset selection and portfolio construction and pursuit of our core investment objective the generation of sustainable income for our shareholders.
Finally, I want to highlight just a few of the competitive advantages that accrue to us and our shareholders for being part of the broader Carlyle platform.
First our platform offers a highly differentiated origination proposition as.
And as the coordination of our wide sourcing funnel, our scaled capital base and our breadth of product offerings and.
Low us to be highly selective and our investments while also diversifying risk factors and our portfolios.
Additionally, our platform utilizes the deep embedded expertise at Carlisle, which improves our due diligence negotiation and investment structuring.
Whether it is a specific company industry geography, or asset type or platform consistently delivers us valuable insights and execution and advantages and form the foundation of our investment performance.
And how quickly allow me here to introduce Alison and her dairy who joined US as head of C. G. BD shareholder relations late last year.
Many of you will know Allison from her time, covering bdcs and the sell side and we're excited to have her working with our team, including Dan Harris and providing a best in class investor experience for our shareholders.
Please do not hesitate to reach out to out and should you have any questions regarding our company.
Let me now hand, the call over to our Chief investment Officer Taylor Boswell.
Thank you Linda.
I'll begin with a quick comment on carlyle's current macroeconomic perspectives, which we develop based upon inputs from across our global footprint.
After that having discussed portfolio and credit evolution at length in past calls for.
My comments today on our origination activity in recent quarters.
Overall global economic activity continues to be characterized by substantial dispersion across industries and geographies.
While no downturn affect spending categories equally the pandemic induced recession has been unprecedented and that it has created far wider than usual gaps between winners and losers.
Our preliminary data year to date suggests that U S. GDP growth has slowed somewhat from the first quarter of 2021.
But most economists see a strong rebound thanks for larger than expected fiscal stimulus and broader reopening facilitated by vaccinations.
Stimulus prospects have aroused some concerns about inflation risk, but thus far we see scant evidence of overall price pressures with prices paid across the U S economy, consistent with overall inflation of just one 4%.
A constructive macro backdrop and buoyant liquidity conditions have fueled leveraged finance markets out of the box this year with increasingly aggressive execution and high yield and broadly syndicated loans, where demand for papers outstripping supply.
And private credit markets, which have certainly recovered meaningfully since the beginning of the crisis, we continue to see more balanced conditions.
That said as always individual credit selection remains paramount with opportunities for both wins and mistakes and all markets.
As Linda mentioned, the fourth quarter was an extremely active originations environment, and which we deployed $205 million across 26 transactions at an eight 1% average yield.
This activity comfortably outpaced repayments and the same period, which totaled $133 million at an approximate seven 8% yield.
Notably our deployment and the fourth quarter heavily capitalized on the unique strengths of our platform.
We were active leading new investments and our core sponsor finance strategy executing attractive add ons for existing borrowers clothing complex asset backed transactions as well as stepping into the dislocated syndicated market prior to the presidential election.
Our expansive origination footprint and broad execution capabilities allow us to be more credit selective while concurrently diversifying the portfolio's underlying risk factors.
We expect both to accrue to the material benefit of our shareholders over time.
We continue to leverage those same strength this year looking to tactically allocate our capital into the best individual investments across the wide swath of private credit Subsectors and which we operate.
Currently we are seeing the most attractive opportunity set and core middle market investing as robust technical conditions and syndicated markets constrained the upper middle market relative value proposition.
However, as has always been the case and leveraged finance markets, we expect the location of credit relative value to be dynamic.
With access to the benefits of our highly capable platform, we remain confident and our ability to deliver regardless of the direction and which opportunity migrates.
Turning to repayments and an active M&A environment, one would normally expect them to increase and they have particularly and our M. M. C. F. One portfolio, where total assets decreased from the prior quarter.
That said from a portfolio management perspective, we focus on cumulative exposure stem Mcf wanted Mcf two and on that basis, we remain comfortable and the sustainability of distributions from those vehicles.
Finally, I should make a quick comment on credit.
We have discussed in depth each of the last several quarters.
Fourth quarter played out favorably and as expected while we remain vigilant on risk we continue to feel that our COVID-19 impacted borrowers have largely address their problems and have sufficient liquidity to bridge to demand recovery.
Again this quarter, we had no new non accruals experienced positive valuation migration and accounting for the Mcf II transaction constructive risk ratings progression and our portfolio.
We believe the portfolio is fundamentals combined with our appropriately conservative valuation approach leave us well positioned to continue to deliver solid credit performance and the coming quarters.
As always thanks for your time and support.
Tom.
Thank you Taylor.
Kiddo, beginning with a review of our fourth quarter earnings that I'll provide further detail on the portfolio and our balance sheet position.
As Linda previewed we had another impressive quarter of income generation.
Total investment income for the fourth quarter was $44 million up from 43 and the prior quarter the.
The increase was driven by a few factors.
And increase in OID accretion and prepayment fees from a normalized level of loan repayments.
Higher fee income stemming from new originations.
And an increase in total dividends from the two JV.
This was partially offset by a decrease in interest income from a lower average invested loan balance primarily due to the contribution of assets to the new JV.
Total expenses were flat versus prior quarter at $22 million.
This resulted in net investment income for the quarter up 38 cents per common share or $22 million.
Exceeding the general guidance, we provided for last couple of quarters.
On February 22nd our board of directors declared the dividends for the first quarter of 2021.
At a total level of 37 per share.
Comprising the 30 to set regular dividend plus a five cent supplemental.
Which is payable to shareholders of record as of close of business on March 31.
As we look forward to the rest of 2021, we remain very confident and our ability to comfortably deliver the 30 to set regular dividend plus continue to pay sizable supplements in line with the force sense, we've been able to pay the last few quarters.
Moving on to the performance of our two JV total dividend income was $6 $5 million up over 10% versus prior quarter, while total assets at the Jv's were flat at about $1 3 billion.
The earnings increase was driven by the addition of Mcf two while total asset growth was muted by heavy repayment activity at NMC F. One.
On a combined basis, our dividend yield was about 10%.
Looking forward, we see aggregate assets yield and dividend generation from the two JV to stable in the coming quarters adjusted for a full quarter of contribution from <unk>.
And evaluations, our total aggregate realized and unrealized net gain was $16 million for the quarter.
The third consecutive quarter of positive momentum following the drop in March of 2020.
Similar to the last two quarters, we saw valuations increased based on the continued rebound and market benchmark yields plus improving credit.
Using the same buckets have outlined in prior quarters, we saw improvement across the board.
First performing lower Covid impacted names plus erected investments and the Jv's, which accounts for a combined 70 per cent of the portfolio increased in value about $5 million compared to 930.
The assets that it and underperforming pre pandemic, some which have COVID-19 exposure were also up $5 million.
Mark and the third consecutive quarter of stability or improvement.
Our successful exit at par of our investment and Hydro farm valued and the mid Seventy's last quarter was a key driver.
The final category is for moderate to heavier COVID-19 impacted games while.
While we believe it's prudent to be somewhat conservative and our assessment of these credits, particularly given some second weighted impact is two experienced a net $6 million increase and value driven primarily by investments and the aerospace and business services segments.
I'll turn next to the portfolio and related activity.
Building on Taylor's comments, we continue to see positive momentum across the book.
Total non accruals decreased from three five to three 2% based on fair value.
For total fair value transactions risk rated three to five indicating some level of downgrades. Since we made the investment is down by about $30 million and the aggregate.
The flood of amendments from the third quarter is largely behind us with relatively limited activity during the fourth quarter and into early 2021.
You'll see and the cases of direct travel and central security that we closed successful restructurings and now hold both debt and equity instruments and.
And both cases, we think with lenders now holding majority of the equity we're better positioned to achieve superior recoveries.
I'll finish with a review of our financing facilities and liquidity.
Total debt outstanding was approximately $1 billion at quarter, and that's down from $1 1 billion as of 930.
The reduction in debt was primarily due to the net proceeds from the closing of the second JV in November.
Statutory leverage was down from one three to one two times.
While net financial leverage which assumes the preferred is converted and is the risk metric we use to manage the business was down from one two to one to under one one times.
So we're sitting close to the lower end of our target range of one out of one four times.
This provides us comfort and the case of any unexpected twists and the macro environment like we experienced last year.
And also offers us flexibility to invest prudently and attractive new opportunities.
In the fourth quarter. We also closed on an incremental $75 million of unsecured notes for the coupon of four 5%.
We used those proceeds to repay and retire one of our legacy secured financing facilities.
So we both simplified and fortified our financing structure during the quarter.
And regarding the preferred equity issuance from May of 2020.
Our stock is now trading well above the conversion price.
But as we've noted previously this instrument remains a long term investment by Carlyle and our BDC.
Currently has no intention to convert.
With that back over to Linda for some closing remarks.
Thanks, Tom.
2020 was a year like no other cash.
Taylor, Tom and I are extraordinarily proud of how the team navigated through such a high risk and volatile market environment as.
As we begin 2021, we are confident and the positioning of our portfolio balance sheet and our earnings outlook.
Thank you all for your time and support today and I'd like to ask the operator to open the line for questions.
Thank you before we begin our Q&A process TCG BDC CFO, Tom Hennigan would like to add a few quick comments.
Thank you operator.
Quick note.
As you may have seen on page six of our earnings presentation, and we publish and increase in oil and yields on investments on both a cost and fair value basis I. Just wanted to highlight for 12 31 figures. Those include our two Jv's. If you were to exclude the two JV that would be consistent with the prior method the quarter over quarter increase was actually closer to 10 basis.
Points I just wanted to highlight that we expect we expect to issue comparable figures in the near term.
Now we can move to questions. Thank you operator.
And ladies and gentlemen, as a reminder to ask a question you will need to start and the one key on your Touchtone telephone to withdraw your question was the pound key please standby, while we compile the Q&A roster.
And our first question coming from the line of Finian O'shea with Wells Fargo. Your line is open.
Hi, everyone, Thanks, and good morning.
First question on the amendments.
I think one of you said.
That debt debt that chapter is concluding on the need for amendments and your portfolio.
Can you expand or give us some color.
And now with.
And hopefully that chapter behind us with Covid behind us.
Now this.
Batch of portfolio companies.
Presumably that presumably they mostly tripped EBITDA maintenance covenants or something like that.
And how they are rebounding to date.
Any color there.
Hey, Ben you've got you got you got Taylor on the line.
As you would expect across a diversified portfolio theres a wide range of answers to that question.
Think that.
Generally what we see across the portfolio is is not that the crisis is over but rather that the outcomes can be pretty confidently bounded.
At this point and that the borrowers and our portfolio have generally.
Addressed their liquidity issues, I think that to Peel and some of the subsectors around.
How things are recovering I think thats and feels to us.
As if a number of the consumer oriented sectors.
And the like.
<unk> sort of found more stable footing, where there has been demand recovery and.
Continued progression, but remains well below.
Prior periods, but the businesses generally have recovered a fair amount.
We are hopeful.
In the last couple of months that exposures more in spaces like travel and and aerospace are finding the bottom and this period and we've seen a couple of those borrowers sort of start to inflect upward again from a profitability perspective, but those are still.
More severely demand impacted sectors again, all in the context of.
Many of these borrowers having sufficient liquidity to bridge and long period of time back to that recovery, but hopefully that gives you a little feel for for what we're seeing both generally and then as you come down into some of the more.
And sectors. If you will is that helpful.
<unk>.
Very much so and.
And.
A follow up on the converts.
Again I appreciate you from.
And again.
Outline that that's a longer term instruments, although it's now.
And in the money.
What happens.
What happens at the maturity of the convert does.
And you pay it back like debt or does it automatically convert or.
Are there a range of outcomes.
And it's Tom on the convert and there's no there's no maturity date.
So there are various timeframes, and which won't the issue or the investor or able to redeem but those are optional as well as obviously the option to convert so theres really no maturity date.
In terms of a force action on the instrument.
Great. Thank you forgot about that and.
Just a final small question on the special dividends.
Tom I think you.
Outline that youll.
To continue to earn a healthy clip of supplemental.
And now the portfolio has stabilized we're through Covid and so forth.
And it sounds like you plan to keep.
The current core and and supplemental payout for.
Or is his.
Are you considering.
Perhaps restoring or partially restoring.
Your core dividend.
And so right now you'd noted we feel very good about delivering very consistent results as we have for last couple of quarters and that would.
We've been for 36 37 cents for the last couple of quarters, we feel very confident and that level and for now certainly anticipate continuing with <unk> 32 regular plus the.
Additional being paid us and supplemental each quarter.
Okay.
Just for everybody.
And just to jump for Joy and.
And remind you so.
And our new policy and and just in the in the intent on being as transparent and consistent consistent with investors. This policy as possible. We don't really want to change the policy back. If you will so I think you should expect us to stay like this for for quite some time.
Okay. Thanks, so much and congratulations and the quarter.
Thank you.
Our next question coming from the line of Paul Johnson with <unk>. Your line is open.
Yeah, Hey, good morning, Thanks for taking my questions.
And congratulations and make progress with the portfolio.
And just have a few questions and I'm wondering as we move forward and the cycle.
How do you expect the average size of your borrower to change if at all.
And also in addition to that do you potentially see any sort of increased demand for <unk>.
And second lien or potentially junior.
Debt in your portfolio.
Hey, Paul It's Taylor how are you.
Yes, I think on the bar from a borrower size perspective were for.
Fortunate to have a significant platform that lets us.
Actively participate across a bunch of different elements and the marketplace really our platform is aligned to participate kind of from $20 million of EBITDA.
If all the way through into the upmarket broadly syndicated high yield world when that's appropriate.
And any given quarter, depending on where we see the relative value. We may tack ourselves on the margin and are out of different sub segments from an EBITDA perspective, but I think that.
The core of the portfolio and the averages over time will probably live about where they where they are.
So I don't think we see a significant change, but rather see ourselves tack and around the market.
When the rail valve boots and marketplace as regard to your question around around second lien.
And we're comfortable with the general construction of our book right now from a high level allocation perspective.
Same comment applies you may see a bump bump around a little bit of a percent or two here or there as relative value opportunities migrate and the market, but I would tell you is.
And this market environment.
And lean structure, which tends to be more prevalent upmarket bigger borrowers is not a place where we see extraordinary relative value and markets because that product is being served by a larger liquid markets quite aggressively right now so and this moment.
The trend is probably gone a little bit the other way, but big picture, we will see stability and participate across these markets overtime.
Okay. Thanks for that that's very good color and.
And then.
And as yields have declined and you and spreads have tightened over the last several months or so.
And this is kind of what we've seen in the middle market, but I'm just curious as I'm looking at your schedule of investments and some of your new investments.
And the previous quarter.
It doesn't appear to be the case, but I'm just curious if you're experiencing any sort of pressure on the LIBOR force terms and in any of your.
And any other loans that you are sourcing.
In our core middle market book, we really are not.
In the upmarket World again, the 100 million plus EBITDA borrower.
You are seeing a migration down and some pressure on floors, and particularly hot transactions and maybe to 75 basis points rarely to 50 basis points.
But general stability from a floor perspective, and the core middle market.
Okay. Thanks for that.
Congrats again on a good quarter and that's all for me.
Thanks.
And our next question coming from the line of Melissa Wedel with Jpmorgan. Your line is open.
Good morning, everyone and thanks for taking my questions today.
And I'd like to earn for the last question to start with actually and.
Could you remind us.
And what your current average or is on your debt investments right now.
And it's Tom.
Most of our loans.
Large portion typically for was 1%.
And there and that if and when you look at our first lien book, It's I'd say, it's vast majority of the loans, it's really those second lien loans, where we're going more up market.
And those are the transactions, where we're more likely to not have a LIBOR floor or lower LIBOR floor.
And on average, it's probably 80 and 90 basis points.
Okay, So 80 and 90 across the.
The second lien component or aircraft for total portfolio.
And across the total portfolio and Thats assumed <unk> debt.
With the zero weighted and there that's why it's not 1% with a handful of floors at 75 basis points, but vast majority of 1%.
There was just for clarity there was a moment and the market a couple of years ago. When when LIBOR was north of two where borrowers were able to drop their floors meaningfully and we haven't seen as much of that since then and so theres a couple of legacy positions from from that environment still and the book.
Got it okay. That's helpful. Thank you.
And in terms of activity I think you.
You were pretty clear that you remain active in this environment, you're seeing from and attractive risk adjusted opportunities.
On the repayment side how are you.
And do you anticipate any sizable repayments in the near term and then how are you thinking about that generally throughout the remainder of 'twenty one.
Hey, Betsy.
Repayments front, it's interesting when you look back at second quarter third quarter, I think our normalized repayments from Brexit and repayments was practically zero in the fourth quarter, we went back to our more normalized and regularly our M&A activity picked up.
Our regular cadence and.
And level of repayments.
Came back.
And the fourth quarter and I think we anticipate that.
And the first quarter and going forward to date and the first quarter. We've had relatively limited repayments is a couple of deals and the portfolio that we know are up for sale and the sponsor may be looking for refinancing debt. We have on our perspective potential for payment list and I think I think we anticipate first quarter and the rest of 2021 will be.
More normalized level of repayments and certainly an increase from where we were in 2020.
Sure Okay. Thank you.
And I'm showing no further questions at this time I would like to turn the call back over to Linda <unk> for any closing remarks.
Thank you operator, and thank you all for your for your good wishes for for US and I Hope everyone is well and we'll talk to you next quarter. Thanks again.
Ladies and gentlemen, and that does conclude our conference for today. Thank you for your participation you may all disconnect.
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